Unlocking Value: The Role of Net Operating Working Capital Management on Firm Performance and Investment Decisions

Abstract

This study investigates the impact of working capital management on firm performance using a sample of companies from Western Europe and the United Kingdom between 2004 and 2023. Specifically, the impact of short-term corporate decisions on firm performance and long-term investment decisions is researched through an industry-based net working capital approach. The results indicate that efficient working capital management enhances stock and operating performance for firms with positive excess net working capital in case of converging industry median levels by reducing unnecessary capital tied-up. We also document that long-term investment decisions serve as a channel through which effective working capital management influences firm performance. In particular, the findings imply the importance of internally generated resources being utilized into more valuable long-term investments with the aim of creating value for growth-stage companies.